PDF - Private Magazin

triggers for major central banks to inject
this drug in the future. We think
that a rise of the weighted average of
10-year Spanish and italian bond
yields to around 7% could trigger such
an action by the eCB. in the U.S. the
triggers are less easily defined, given
the diverging opinions within the Fed.
However, it is likely that a significant
slowdown of the U.S. economy will
cause the Fed to start a third round of
Qe. For example, when payrolls fall to
100,000 and/or the iSM Manufacturing
index falls to 50, the signs for Qe
will likely turn green.
What are the implications
for investors?
Given the lack of alternatives, it is likely
that new rounds of Qe and the associated
“risk-on” and “risk-off ” periods
will dictate investor behaviour for
some time to come. this has a few important
implications. Firstly, it means
that investors have to be very alert and
nimble, even more so than in the past.
alternatively, they can adopt a very
long investment horizon of a decade or
more, which gives them a good likelihood
to fully capture the premium
yields which risky assets still offer.
Secondly, investors have to realise that
correlations of risky assets in “riskoff
” periods may remain very high. in
other words, when markets become
nervous there are very few places to
hide. Only government bonds of the
strongest countries, securities of the
most defensive multinationals and certain
commodities have proven to be
real safe havens.
What kind of risky assets
do we prefer?
Let us first look at equities. For 2012 as
a whole, we expect corporate earnings
to be roughly flat for U.S. companies
and to decline moderately for european
companies. the core reason for
this slowdown is declining revenue
growth; a direct consequence of lower
global growth combined with diminishing
profit margins. However, compared
to previous recessions we only
expect a moderate profit decline this
time. Companies do not struggle with a
big inventory overhang or excess capacity.
On top of that, they have not
added a lot of “fat” during the latest
recov ery. Costs are kept well under
control, which makes companies’ earnings
more resilient to a downturn in
revenues. in general, companies are in
good shape. Balance sheets are strong
and profit margins have been largely
restored to pre-Lehman levels and this
despite the below-par economic recovery
we witnessed over the past two
years.
Current equity valuations already
reflect many uncertainties. From a historic
point of view, the trailing price/
earnings ratio for global equities is
more than 1 standard deviation below its
40-year average. in europe, the valua -
tions relative to the government-bond
markets are close to the levels reached
in the aftermath of the Lehman crisis.
Of course, this has as much to do with
low bond yields as with cheap equity
valuations. in a low-growth or recessionary
environment, bond yields and
equities move in the same direction.
We will, of course, observe big divergences
between companies. those
heavily dependent on european sales
and a high commodity input will undoubtedly
suffer most; especially as
emerging-market growth is likely to
keep commodity prices high. inter -
nationally, emerging-market-exposed
companies will fare better. We gener -
ally prefer the big multinational companies
in sectors such as technology,
energy and consumer goods (with a
limited cyclicality) for the long term.
in an environment where there is limited
room for profits to rise, we focus on
high, stable and well covered dividends
as an attractive source of income.
For bond investors, as for equity
inves tors, the potential for significant
price gains has become limited. therefore,
the annual income generated by a
AKTUELL x
bond investment has gained in importance.
in this sense, emerging-market
debt (in hard currency) is still one of
our preferred asset classes. in general
and despite recent doubts, prospects
are better for emerging markets than
for developed markets. We think that
emerging markets will perform in line
with their superior fundamentals (low
indebtedness, high growth, vast countercyclical
ammunition, attractive valuations
etc.). a necessary condition for
this is a soft landing in China. Lately
some doubts were popping up and fears
of a hard landing crept into investors’
minds. We nevertheless think that
China is still on track for a soft landing
and that it will ease policy if necessary.
a failure on this front would be very
detrimental for cyclical assets and
would limit the much-needed growth.
We also like high-yield bonds, an
asset class which is dominated by midsized
U.S. corporates. investors are still
relatively well rewarded for the risk
taken in this asset class. as stated before,
corporate balance sheets are in
good shape and the risk of a deep U.S.
recession and high corporate default
levels is limited, given the fact that the
Fed will initiate new rounds of Qe as
long as necessary.
Having said this, we are still living
in an environment where investors have
to deal with short and intense cycles.
Effective risk diversification can only
be realised when also holding some
low-yielding government bonds. even
so, the rewards for taking risk are still
substantial. after all, risky assets offer
attractive yields and some protection
against inflation for those who fear it.
We do not, yet.
ad.van.tiggelen@ingim.com
www.ingim.ch
Effective risk diversification can only be realised when also
holding some low-yielding government bonds. even so, the rewards
for taking risk are still substantial. after all, risky assets
offer attractive yields and some protection against inflation for
those who fear it. We do not, yet.
Private 3/2012 11